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BRUSSELS (Reuters) - European Union leaders will need to agree a first-ever cut in the bloc's long-term spending plans if they are to clinch a deal at a summit starting on Thursday, with the drive for austerity likely to trump all other concerns.
German Chancellor Angela Merkel played down the chances of an agreement this week, even though senior EU officials warned that failure could lead to a renewed crisis and derail efforts to shore up the euro zone.
Officials preparing the meeting, which could drag into the weekend in the search for a breakthrough, said substantial cuts in spending for 2014-2020 compared with the current 7-year budget framework were the only viable basis.
But while some net contributors to the EU budget, such as Britain and Germany, are firmly agreed on the need for cuts, other powerful states, such as France and Poland, are determined to resist sacrifices directly affecting their interests.
"We believe a real terms cut in the overall ceiling is necessary," said an EU official close to the talks, speaking on condition of anonymity. "The consequences of no deal would be serious, and we don't see how a different timeframe would result in a game-changing proposal."
European Council President Herman Van Rompuy has already proposed cutting the European Commission's planned 1,091 billion euro ($1.4 trillion) budget by about 80 billion euros.
EU officials say that represents a real terms cut of about 20 billion euros compared with the current expenditure ceiling of 1,034 billion for 2007-2013, which Britain's Prime Minister David Cameron could use to claim victory in the summit.
But Britain - along with Germany, Sweden and the Netherlands - is pushing for even deeper cuts of at least 100 billion euros to the Commission's blueprint.
All 27 member states have a veto but Cameron, under pressure from Eurosceptic rebels in his Conservative party, has been most vociferous in threatening to wield it.
Sources familiar with Van Rompuy's thinking said they expect the summit chairman to try to shave a further 20 to 25 billion euros off the Commission's proposed total in a final compromise he plans to put to leaders only late on Thursday night.
The extra savings are expected to come mainly from EU funds earmarked for big cross-border infrastructure projects and administrative spending on officials' salaries and perks.
Any further cuts to the two main EU spending programmes for farm subsidies and development aid for the bloc's poorer regions - which jointly make up three-quarters of the total - could meet fierce opposition from beneficiaries such as France, Italy, Poland and Hungary.
Unlike previous budget deals, which EU leaders had to thrash out among themselves, Van Rompuy will assume the role of chief negotiator at this week's summit, with European Commission President Jose Manuel Barroso on hand to crunch the numbers.
The two will hold 10-minute individual "confessionals" with each of the EU's 27 leaders during the day on Thursday in an attempt to divine where their ultimate red lines lie.
Van Rompuy's aides said the real bargaining will take place in bilateral or small group meetings of heads of state and EU officials, with all leaders only coming together occasionally to approve elements of a deal "or to put concerted pressure on one or two countries".
With so many heads of state and government on hand and talk that the summit could last until early on Sunday morning, officials predict a lot of down-time with delegations retreating to their hotels to await the summons from Van Rompuy.
"It's going to be a logistical nightmare as leaders will have to be available at all times for bilaterals, but most of the time they will be sitting bored in their delegation rooms at the council or talking to journalists," one EU official said.
Before the last EU budget marathon in 2005, former German Chancellor Gerhard Schroeder and his French counterpart Jacques Chirac had struck a deal to preserve agricultural subsidies in nominal terms, infuriating Britain's Prime Minister Tony Blair.
Blair vetoed a first attempted compromise only to broker a deal six months later by reducing the money available to help the new member states of central and eastern Europe.
A Franco-German deal to exempt farm payments from cuts is considered less likely this time, with Berlin seemingly keener to curb overall spending that to featherbed farmers.
Whatever the outcome, officials say the EU's biggest economy and top budget contributor will be at the centre.
"What Merkel thinks will obviously be very important," the EU official said. "The German approach in the negotiations will be more or less where we end up."
Additional reporting by Noah Barkin and Stephen Brown in Berlin; Editing by Paul Taylor